07/01/2014

The objections which the various schools of Sozialpolitik raise against the market economy are based on very bad economics… They blame the market economy for the consequences of the very anticapitalistic policies which they themselves advocate as necessary and beneficial reforms. They fix on the market economy the responsibility for the inevitable failure and frustration of interventionism.

- Ludwig von Mises, Human Action

In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones.

- Ron Paul

In a recent opinion column in The New York Times, “Inequality Is Not Inevitable”, Joseph Stiglitz argues that the vast amount of inequality found in the United States isn’t a product of economic laws which we have no control over, but rather a product of dysfunctional politics. He argues that corruption and a decline in solidarity have ensured that American citizens are no longer able to secure a fairer America - one corresponding more to the Universal Declaration of Human Rights - than we have now.

Even though he emphasizes the importance of politics and correctly recognizes that America has a crony-capitalism problem, Mr. Stiglitz does very little to actually suggest specific policies to ameliorate the difficulties he writes about. The reason for that is that the fails to identify the very real cause-and-effect relationships which are causing the problems he is dissatisfied with, yet he fails to provide an understanding of them. Namely, that the reason the Federal government is so corrupt is that there are so many opportunities for cronies to manipulate the system and thereby enrich themselves. Although he writes about the problem as one of practical politics rather than technical economics, he fails to adequately address the technical problem of crony capitalism which needs to motivate any viable.

Despite what Mr. Stigliz suggests, laissez-faire capitalism isn’t the cause of the corruption within the Federal government on these matters; in fact, the corruption is possible because it doesn’t follow such policies. If laissez-faire capitalism is anything, it corresponds to the natural system of liberty that Adam Smith describes in The Wealth of Nations, that state of affairs in which the sovereign has no other duties but to defend the nation from outside belligerence, to protect the nation from belligerence within, and to erect those necessary public works. There is wiggle room for certain aspects of policy, but that wiggle room excludes such vast redistributive efforts as bailing out Bear Stearns or General Motors.

In fitting fashion, Mr. Stiglitz ignores that the very maladies he rallies against aren’t caused by laissez-faire capitalism; instead they are caused by the government creating opportunities for profit from government favor. He fails to consider that human beings are natural entrepreneurs who will sniff out every possible profit opportunity. Just as profit opportunities create vast patterns of specialization and trade within the commercial society so too they create similar patterns with respect to the government and the cronies.

What separates these patterns, though, is that they aren’t created by providing products people are willing to spend their scarce money to acquire, but they are acquired through political patronage. The market is thereby perverted from a system of profit and loss, in which those firms that supply the market with its most urgently desired products survive and those who don’t disappear, into a system of crony capitalism, in which those who yield political favor get to cheat profit and loss. Under such a régime of crony capitalism, there is no guarantee that those firms which survive are those firms which are most valued by the consumers.

The problems Mr. Stiglitz associates with capitalism as it is today aren’t problems with the natural system of liberty; rather, they are problems which originate when the government has the power to take from some to give to others on a regular basis. Though legislators may very well intend to help a specific set of people like the poor, their actions create opportunities for those clever enough to exploit the given system for their own benefit. As we all know good intentions don’t guarantee good outcomes. The “rent-seeking society we have gravitated toward, in which the wealthy obtain riches by manipulating the system” is only possible outside of the society of natural liberty, and in a society in which the government has the power to make some rich at the cost of others.

The Federal government does indeed have a massive corruption problem, but that problem is because of how regulation is put into effect. For example, the Securities and Exchange Commission has the duty to regulate banking, and largely does so by hiring the experts in the field, which just so happen to be the very bankers the SEC is supposed to regulating. Regulators who spend a long time learning the regulatory craft in DC are paid a fortune to then inform Wall Street banks how best to profit from those regulations. Do those bankers help the banks to provide better services to their consumers? Not so much. Instead, they tell the banks how they can make money by manipulating regulations by hiring the very people who once enforced them. At that point, the criteria for succeeding as a bank is no longer about the approval of the customers, but rather the approval of the Federal government and that’s problematic at best.

Blaming bankers for seeking the SEC’s favor is like blaming a dog for barking. It’s going to do little good. Place the blame where it deserves: that there are channels by which the government can take from some to give to others. Leave the natural system of liberty out of the accusation.

Selfishness may be one of humanity’s great curses, but we cannot blame selfishness for the failure of political systems just as we cannot blame gravity for airplane crashes. There are always going to be vicious people who would impoverish those in need for their own betterment. We cannot expect them to be virtuous. The problem of policy isn’t so much to make people more virtuous as it is to ensure that policy can function despite people being vicious. Policy should be made with a full understanding that there is vice like greed in society, and it should be made so that it isn’t robust to that vice. That isn’t simply a matter of practical politics, but of technical knowledge because one has to know how greed influences political systems to design policies robust (better yet antifragile) to it.

As much as Mr. Stiglitz emphasizes that alleviating inequality is a problem of practical politics, he gives no solution as to how to ensure that his political vision can withstand the vice of humanity. He rallies against the greed of bankers without actually saying how policies can be better adapted to that fact. Repeating “politics is overrun with money” is a well-rehearsed cliché, not a viable solution to the Federal government’s corruption. The same thing is true for saying that such a system of social democracy works for the Nordic nations. This is America, we’re talking about, not Finland, Sweden, or Norway. What works there may very well not work here, for reasons like different demographics and histories. Overall, though “Inequality is Not Inevitable” identifies problems Mr. Stiglitz has with American society, it fails to provide any means of actually fixing politics, and he fails to account for the human condition when doing so.

The problem with American capitalism is that regulations have opened up avenues for profit opportunities which involve entrepreneurs manipulating public policy for their own betterment. Regulators and politicians now have such control over who gets what in the economy that it is now advantageous for people to court the opinions of those within the government.

If we desire to end the régime in which businesses can enrich themselves by manipulating the system, then we must move towards the natural system of liberty in which businessmen simply have no incentive to buy government favor since the government has no real means of enriching whole classes of people. That, and not the desire for a fairer America, is the best remedy for the corruption within the Federal government, and the overwhelming power cronies have over American politics.